## Facts

- John B. Dalton worked for Prudential Securities, Inc. from 1983 to 1989, including service as the Tulsa branch office manager before being demoted; he resigned in July 1989.
- Dalton executed a securities-industry Form U-4 containing an arbitration provision, and the parties were subject to NASD arbitration rules.
- After Dalton left, Prudential filed a Form U-5 stating the reason for his departure as required by NASD rules.
- In 1991, a former customer filed an NASD arbitration claim against Prudential and others (including Dalton), alleging unsuitable investments, failure to supervise, breach of fiduciary duty, and fraud relating to limited-partnership investments.
- Prudential settled the customer’s claim for $137,000 without contribution from Dalton.
- Prudential then filed an amended Form U-5 for Dalton that referenced the customer’s complaint and checked boxes indicating an investment-related complaint involving alleged damages of $10,000 or more and a settlement or decision “against” Dalton for $5,000 or more (or involving allegations of fraud or wrongful taking of property).
- Dalton alleged the amended U-5 was false or misleading because he paid nothing toward the settlement and the filing harmed his reputation and employment prospects.
- Dalton initiated NASD arbitration against Prudential for breach of fiduciary duty and tortious interference with prospective economic advantage based on the amended U-5.
- Prudential moved to dismiss in arbitration, asserting privilege and estoppel; the panel dismissed Dalton’s claims without discovery and without an evidentiary hearing.
- Prudential sought confirmation of the arbitration award in federal court under the Federal Arbitration Act (FAA), and Dalton counterclaimed to vacate the award; the parties filed cross-motions for summary judgment.

## Issues

1. Whether the arbitration panel’s dismissal without discovery or an evidentiary hearing constituted “misconduct” or “misbehavior” under FAA § 10 warranting vacatur.
2. Whether the arbitrators exceeded their powers by denying Dalton a fundamentally fair hearing on his claims relating to the amended Form U-5.

## Decision

- The court denied Prudential’s motion for summary judgment seeking confirmation of the award.
- The court granted Dalton’s motion for summary judgment seeking vacatur.
- The court vacated the NASD arbitration award, holding that dismissing Dalton’s claims without discovery and without a hearing denied him a fundamentally fair hearing and amounted to arbitrator misconduct under FAA § 10.

## Legal Principles

- Judicial review of arbitration awards under the FAA is narrow, and vacatur is limited to the grounds stated in 9 U.S.C. § 10.
- Arbitrators commit vacatur-worthy “misconduct” under FAA § 10 when they refuse to hear evidence that is pertinent and material to the controversy.
- Arbitration must satisfy basic requirements of fundamental fairness, including a meaningful opportunity to present evidence on disputed, fact-dependent claims.
- A summary dismissal that prevents reasonable development of a record—through discovery and a hearing—may deny fundamental fairness and justify vacatur, even though arbitrators have discretion over procedures.

## Conclusion

The court vacated the NASD award because the arbitrators dismissed a non-frivolous, fact-dependent dispute over allegedly misleading Form U-5 disclosures without allowing discovery or an evidentiary hearing, depriving Dalton of a fundamentally fair hearing under FAA § 10.


Prudential Securities, Inc. v. Dalton, 929 F. Supp. 1411 (N.D. Okla. 1996)